Limitations of Fraud and Default

Legal competence is the ability of a legal subject to perform legal acts.[13] Legal subjects themselves are divided into two, namely natuurlijk persoon and rechts persoon. Competence natuurlijk persoon can be assessed from their age, as regulated in Article 47 in conjunction with Article 50 of the Marriage Law. On the other hand, for rechts persoon, competence is the authority to represent, for example, Article 98 paragraph (1) of the Limited Liability Company Law which stipulates that the Board of Directors is authorized to represent the company.

Basically, a specific matter is the object and content of the agreement.[14] The object of the agreement is regulated in Articles 1332 to 1334 of the Civil Code. According to Hardijan Rusli[15], the term ‘zaak’ in Article 1333 of the Civil Code must be interpreted as the main issue because the object of the agreement is not always an object, but can also be a service.

The concept of 'causa' in Article 1320 of the Civil Code must be linked to Articles 1335 and 1337 of the Civil Code, namely the causa finalis which is the goal of the parties when the contract is about to be closed.[16] The intended causa is not a cause-and-effect relationship. As for 'permissible' it is not only about the content of the agreement, but the existence of the agreement itself, whether it is permitted or not by law, for example nominee agreement in the purchase of shares by foreign parties.

Regarding the first and second conditions, if they are not met, they can be canceled (voidable), while for the second and third conditions it is null and void. The concept of voidable is that the agreement is not void, but must be submitted to the court. On the other hand, null and void means that the agreement is considered invalid from the start.

Even though a contract has been created in such a way, the potential for disputes always exists for various reasons, including default. According to Yahman[17], default occurs when the debtor does not fulfill their obligations which are not affected by circumstances (force majeure).

Default can occur for two reasons, including the element of intent, whether truly intentional or negligent, and due to overmacht.[18] The forms of default can generally be divided into three, including not fulfilling the performance at all, delayed fulfillment of the performance, or fulfillment of the performance that does not comply with the contract clauses.[19]

The default committed by the debtor automatically gives the creditor the opportunity to enforce their contractual rights, including:[20]

1. Fulfillment;
2. Compensation;
3. Dissolution, termination, or cancellation;
4. Fulfillment plus complementary compensation; or
5. Dissolution plus complementary compensation.

Fraud is a crime contained in the Second Book of the Criminal Code Criminal Code (hereinafter referred to as “KUHP”). According to Dudung Mulyadi[21] who quoted Prof. Moeljatno, the elements in the article a quo are as follows.

1. Someone is persuaded or moved to hand over an item or create a debt or eliminate a receivable. The item is handed over by the owner by means of deception. The item handed over does not always have to be their own, but also belongs to someone else.
2. The fraudster intends to benefit themselves or another person without rights. From that intention, it turns out that the goal is to harm the person who handed over the item.
3. The victim of the fraud must be moved to hand over the item by:
4. The handover of the item must be a result of deceptive actions.
5. The fraudster must deceive the victim with a trick regulated in Article 378 of the Criminal Code.

According to Yahman[22]Fraud in the realm of civil law usually begins with a legal contractual relationship. The formulation of Article 1238 of the Civil Code regarding fraud does not clearly elaborate on its elements, so it can borrow elements from Article 378 of the Criminal Code.

When one party in a contract fails to perform its obligations, either absolutely or relatively, a default has occurred. This situation is the right time to assess whether the inability remains within the scope of civil law or rather the defaulting debtor did not intend not to perform from the beginning.

Heri Purwanto[23] argues that there are several conditions for fraud in a contract to be used as a reason for cancellation and to meet the provisions of Article 1238 of the Civil Code, including:

This is the case if a motorcycle seller second hand says that the motorcycle he sells is in good condition, but in fact, after being purchased by a buyer, the motorcycle is not as expected, then this reason is not sufficient to be a reason for cancellation. It is different if a seller says that what he sells is foreign goods complete with falsified documents because the goods are actually domestic goods, then this reason can be used as a reason for contract cancellation.

The nature of the fraud nondisclosure is to keep a substantial fact or information secret, for example, a seller knows that the buyer is looking for new goods but the seller remains silent when he gives the buyer a half-used item.

This fraud is carried out by not providing some substantial information while some is provided so that providing information like this can be misleading.

Someone sells a used taxi car before the car is sold, the seller first makes adjustments both from the documents and modifications as if the car is not a used taxi car, if in a normal situation the buyer would not want to buy a used taxi car.

This is evident in Decision Number 1071 K/Pid/2015 with the following chronological description.

1. The Defendant Kim Sam Youn as President Director of PT Ever Pioneer entered into a coal sale and purchase agreement with PT Prima Jaya Indah represented by Anton Mustika.
2. The Defendant determines the specifications of the coal to be purchased at a price of 66 US dollars/MT for a total of 62,754 MT and the delivery due date is May 6, 2011, which will be paid using Letter of Credit from Shinhan Korea Bank worth 3,912,000 US dollars.
3. PT Prima Jaya Indah took coal from PT Dewi Putri Asian which was checked by surveyor independent, namely PT Geoservices so it was immediately sent to Korea on May 7, 2011.
4. Anton Mustika contacted the Defendant and conveyed that the coal did not match the specifications while giving options, namely the goods were canceled or still sent. Upon this notification, the Defendant did not provide certainty so the coal was still sent.
5. Upon arrival in Korea, the carrier ship was unloaded and immediately sold to Konsep (PLN) Korea without the knowledge and permission of PT Prima Jaya Indah.
6. Until the coal was sold to another party, PT Prima Jaya Indah had not received payment because the LC provided could not be disbursed on the grounds that the coal did not match the specifications based on the contract.
7. The Defendant's confession as President Director of PT Ever Pioneer is contrary to the fact that in the implementation of the agreement, the Defendant is Ever Pioneer Co Ltd which is located in Korea and does not have a power of attorney to represent.

The Panel of Judges at the cassation level is of the opinion that the Defendant's actions constituted fraud due to the absence of a power of attorney to sign the contract. Furthermore, based on the testimony of witness Anton Mustika, who assigned his staff to go to Korea, it turned out that the Defendant was not a director, employee, or even affiliated with Ever Pioneer Co Ltd. In addition, Shinhan Bank, as the issuer of the LC, also did not recognize the Defendant.

Upon further analysis, the Defendant's actions constituted a series of lies to induce PT Prima Jaya Indah to hand over a sum of money, which fulfills the elements of Article 378 of the Criminal Code. This can be used as a basis for stating that there was bad faith from the outset of the contract's formation, followed by various lies in the contract's execution process.

A contract made on the basis of bad faith can be qualified as fraud. According to Article 1238 of the Civil Code, fraud can be used as a reason for canceling an agreement in court on the basis of unlawful acts. This is in accordance with Article 1265 of the Civil Code jo. Article 1266 paragraph (2) of the Civil Code.[24]

[1] Heksa Archie Putra, “Anticipatory Repudiation As a Reason for Unilateral Termination of Contract”, Thesis, Faculty of Law, Universitas Airlangga, Surabaya, 2023, p. 1.

[2] Salim H S, Contract Law: Theory & Techniques of Contract Drafting, Sinar Grafika, Jakarta, 2019 (hereinafter referred to as Salim H S I), p. 11.

[3] Rocky Marciano Ambar, Budi Santoso, and Hanif Nur Widhiyanti, Juridical Study on the Setting Aside of Article 1266 and Article 1267 of the Civil Code as Conditions for Cancellation in Banking Credit Agreements, Perspektif Hukum, Vol 17, No 1, 2017, p. 66.

[4] Salim H S, Development of Guarantee Law in Indonesia, Raja Grafindo Persada, 2004 (hereinafter referred to as Salim H S II), p. 33.

[5] Wawan Muhwan Hariri, Law of Obligations Equipped with Law of Obligations in Islam, Pustaka Setia, Bandung, 2011, p. 123.

[6] Muhammad Syaifuddin, Contract Law: Understanding Contracts in the Perspective of Philosophy, Theory, Dogmatics, and Legal Practice, Mandar Maju, Bandung, 2012, p. 113, quoted from J.H. Niewenhuis, Principles of the Law of Obligations, (translated by Djasadin Saragih), Surabaya, 1985, p. 2.

[7] RR Anggraeni, Business Contract Law, CV Iqralana, Jakarta, 2021, p. 19.

[8] Wawan Muhwan Hariri, Op.Cit.

[9] Ridwan Khairandy, Indonesian Contract Law in Comparative Perspective (Part One), Fakultas Hukum Universitas Islam Indonesia Press, Yogyakarta, 2013, p. 217.

[10] John D Calamari and Joseph M Perillo, Contracts: Second Edition, West Publishing Co., 1977, pp. 262-264.

[11] J Satrio, Law of Obligations Obligations Arising from Agreements: Book I, Citra Aditya Bakti, Bandung, 1955, p. 350.

[12] Sudargo Gautama, Indonesian Business Law, Citra Aditya Bakti, Bandung, 1995, p. 77.

[13] Salim H S II, Op.Cit., p. 33.

[14] Joni Emirzon and Muhamad Sadi, Contract Law: Theory and Practice, Prenana Media Group, Jakarta, 2021, p. 51.

[15] Hardijan Rusli, Indonesian Agreement Law and Common Law, Pustaka Sinar Harapan, Jakarta, 1992, p. 86.

[16] J H Niewenhuis, Op.Cit., p. 25.

[17] Yahman, An Easy Way to Understand Default & Fraud in Commercial Contractual Relations, Kencana Prenadamedia Group, Jakarta, 2016, p. 81.

[18] Moch Isnaeni, A Brief Overview of Contract Law (General Part), PT Revka Petra Media, Surabaya, 2017, p. 207.

[19] Ibid.

[20] Agus Yudha Hernoko, Op.Cit., p. 263.

[21] Dudung Mulyadi, “Elements of Fraud in Article 378 of the Criminal Code in Relation to Land Sales and Purchases”, Jurnal Ilmiah Galuh Justisi, Vol 5, No 2, 2017, pp. 206-223.

[22] Yahman, Op.Cit., p. 66.

[23] Heri Purwanto, “Fraud as a Reason for Cancellation of Agreement (Case Study of Bantul District Court Decision No. 19/Pdt.G/2009/PN.Btl”, Universitas Islam Indonesia, 2011, pp. 95-96.

[24] Rexy Mierkhahani, “Differences between Default and Fraud in Contract Dispute Resolutionk”, Thesis, Faculty of Law, Universitas Airlangga, Surabaya, 2023, p. 43.